Preferred Bank Reports Quarterly Earnings

LOS ANGELES, April 22, 2020 (GLOBE NEWSWIRE) -- Preferred Bank PFBC, an independent commercial bank, today reported results for the quarter ended March 31, 2020. Preferred Bank ("the Bank") reported net income of $16.2 million or $1.08 per diluted share for the first quarter of 2020. This is down from net income of $18.7 million or $1.23 per diluted share for the first quarter of 2019 and is down from net income of $19.6 million or $1.31 per diluted share for the fourth quarter of 2019. The primary reason for the decrease is the provision for credit losses, which totaled $5.3 million for the first quarter of 2020, as compared to $500,000 in the first quarter of 2019 and compared to $450,000 in the fourth quarter of 2019. The higher provision for this quarter is due to the uncertainty of the impact of the economic shutdown due to the COVID-19 pandemic.

Li Yu, Chairman and CEO, commented, "The speed and the depth of the events that have transpired in the first quarter have been truly remarkable. Despite all of this, our first quarter 2020 net income came in at $16.2 million or $1.08 per diluted share.

"Deposits grew $103.2 million or 2.6% while loans grew $168.4 million or 4.5% on a linked quarter basis.  Much of the loan growth was increased usage of available credit lines by our C&I customers (which we estimated to be around $100 million to $120 million).  With the government's various stimulus programs, we do not expect to see a continuation of this magnitude of draws in the near future.  In any event, our Bank has sufficient liquidity to meet the need should it arise.

"Our net interest margin for the quarter was a strong 3.70%. The FOMC's two rate cuts totaling 150 basis points has changed our Bank's interest rate sensitivity drastically.  As of March 31, 2020, our loan portfolio comprised of 14.9% fixed rate loans, 19.4% is floating rate without a rate floor and 65.7% of loans are floating rate with a rate floor.  With these March rate cuts, all but $28.2 million or 1.1% of these loans now have floor rates equal to or higher than the coupon rate.  Due to this, Preferred Bank is now liability sensitive, after having been asset sensitive for a number of years.  With the TCD portfolio continuously repricing out of higher coupons, we feel that any NIM compression will be a short-term event and improving gradually beginning March 18, 2020.

"Preferred Bank's efficiency ratio for the first quarter was 34.9%.  Based on a study/ranking recently published by S&P Global Market Intelligence, Preferred Bank's efficiency ratio was the best in the nation among all banks $3 - $10 billion in asset size.  Together with the improving net interest margin discussed above, we feel the Bank's operating metrics are sound.

"With the various government stimulus programs, many of our customers in affected industries will find relief in assistance and loan deferment.  However, our economy has likely already entered into a recession.  Returning to our normal lifestyles and growth in economic activity will be gradual.  Going forward, managing our credit quality will be our utmost priority.  Through the implementation of the new accounting standard for credit losses; Current Expected Credit Losses ("CECL"), we have added $8 million to the allowance for credit losses through a transition adjustment to equity.  In addition, our operating provision for credit losses for the first quarter was $5.3 million.

"All of our offices are in areas affected by the coronavirus.  Observing the "stay at home order", roughly 45% of our employees are working from home.  We are devoting our resources to meet the needs of our borrower requests for deferment and for the Paycheck Protection Program ("PPP") loans under the CARES Act.   We have engaged with a third party to offer an automated solution for PPP loans and meanwhile, we applied and received approval from the SBA to begin making these loans. Prior to this, Preferred Bank was not an SBA approved lender but as of now we are processing applications under the program.  In addition, many of our customers are a good fit for the Federal Reserve's Main Street New Loan Facility ("MSNLF")  and Main Street Expanded Loan Facility ("MSNLF") programs.  We are committed to supporting our customers during this critical time.  Preferred Bank is pleased to be a part of the solution.

"The dark days of our nation will be over, soon, we hope.  Meanwhile, we are committed to be a contributor to the recovery."

COVID-19 Relief Effort
Subsequent to March 31, 2020, the Bank has received and granted many payment deferments principally related to hotel loans and restaurant loans.  As of March 31, 2020, total loans to hotels and restaurants amounted to $343 million or 8.8% of the Bank's total loan portfolio.

Other than a $15 million Shared National Credit ("SNIC") loan to a national fast food chain, substantially all of our hotel and restaurant loans are real estate secured with average LTV of 51% and average DCR of 1.64x, together with sponsor's guarantees. 82% of our loans to hotels are to flagged national brands.  The remaining are boutique hotels in choice beach/oceanfront or in major city centers. The Bank's exposure to other parts of the travel industry is insignificant.   

Net Interest Income and Net Interest Margin. Net interest income before provision for loan and lease losses was $41.8 million for the first quarter of 2020. This compares favorably to the $40.9 million recorded in the first quarter of 2019 and the $40.4 million recorded in the fourth quarter of 2019. The increase over both periods is due to loan growth as well as declining deposit costs as interest rates have declined. The Bank's taxable equivalent net interest margin was 3.70% for the first quarter of 2020, a 42 basis point decrease from the 4.12% achieved in the first quarter of 2019 and a 3 basis point increase over the 3.67% posted in the fourth quarter of 2019. The decrease from the first quarter of 2019 was due to lower rates overall on interest earning assets while the cost of liabilities did not decline commensurately. The increase over the fourth quarter of 2019 was due to declining deposits costs and relatively asset yields over the two periods.

Noninterest Income. For the first quarter of 2020, noninterest income was $1,672,000 compared with $1,861,000 for the same quarter last year and compared to $1,883,000 for the fourth quarter of 2019. The decrease from the first quarter of 2019 was due mainly to letter of credit fee income which decreased by $223,000. The decrease from the fourth quarter of 2019 was due to other income which was down by $266,000 between the two periods.

Noninterest Expense. Total noninterest expense was $15.2 million for the first quarter of 2020. This represents a decrease of $510,000 from the same quarter last year and an increase of $1.4 million over the fourth quarter of 2019. Salaries and benefits expense totaled $10.9 million for the first quarter of 2020, an increase of $1.1 million over the first quarter of 2019 and an increase of $1.2 million over the fourth quarter of 2019. The increase over the prior quarter is mostly to payroll taxes, which were higher by $837,000 in the first quarter due to the payout of annual incentives. The increase over the prior year is due mainly to equity compensation expense which was up by $567,000 over the first quarter of last year. Staffing increases were also part of the reason for the increase over last year. Occupancy expense totaled $1.4 million for the quarter and was flat compared to the fourth quarter of 2019 but was up compared to the same period last year. In the first quarter of 2019, the Bank implemented the Lease Accounting Standard, ASC 842, which resulted in a small benefit of $229,000. Professional services expense was $1.0 million for the first quarter of 2020 compared to $1.3 million for the same quarter of 2019 and $834,000 recorded in the fourth quarter of 2019. The decrease from the prior year is due primarily to lower legal fees which were associated with a repossessed property which was disposed in the first quarter of 2019. The increase over the fourth quarter of 2019 was due to legal fees recovered of $159,000.  Other expenses were $1.2 million for the first quarter of 2020 compared to $1.3 million for the first quarter of 2019 and compared to $1.1 million in the fourth quarter of 2019.

Income Taxes

The Bank recorded a provision for income taxes of $6.8 million for the first quarter of 2020. This represents an effective tax rate ("ETR") of 29.7% and a slight decrease from the ETR of 30.1% for the fourth quarter of 2019 and nearly flat compared to the 29.5% recorded in the first quarter of 2019. The Bank's ETR will fluctuate slightly from quarter to quarter within a fairly small range due to the timing of taxable events throughout the year.

Balance Sheet Summary

Total gross loans at March 31, 2020 were $3.89 billion, an increase of $168.4 million or 4.5% over the total of $3.72 billion as of December 31, 2019. Total deposits eclipsed $4 billion to end at $4.09 billion, an increase of $103 million or 2.6% over the $3.98 billion as of December 31, 2019. Total assets reached $4.73 billion as of March 31, 2020, an increase of $99.2 million or 2.1% over the total of $4.63 billion as of December 31, 2019.

Asset Quality

As of March 31, 2020, nonaccrual loans totaled $2.1 million, flat when compared to the same total as of December 31, 2019 and down from the $3.6 million as of March 31, 2019. As of March 31, 2020, total classified loans stood at $31.1 million compared to $27.6 million as of December 31, 2019. Total net recoveries for the first quarter of 2020 were $0 compared to $315,000 in the first quarter of 2019 and compared to $330,000 for the first quarter of 2019.

In the first quarter, the Bank implemented the CECL methodology under Accounting Standards Codification ("ASC") 326, in which the allowance for credit losses now reflects expected credit losses over the life of loans and held-to-maturity debt securities, and incorporates macroeconomic forecasts as well as historical loss rates. The allowance for expected credit losses at the end of the first quarter incorporates a change in the economic forecast late in the first quarter of 2020, to reflect the pandemic conditions, as compared to our initial adoption of CECL. As a result of the implementation of ASC 326, the Bank recorded an additional $8.0 million to the allowance for credit losses through a transition adjustment to equity. The effect of this capital charge on regulatory capital is now being phased in over a five-year period.

The Bank recorded a provision for credit losses of $5.3 million for the first quarter of 2020, which reflects the anticipated impacts from the current economic environment. This compares to a provision of $500,000 recorded in the first quarter of 2019 and compared to $450,000 recorded in the fourth quarter of 2019. The allowance for credit losses at March 31, 2020 was $48.1 million or 1.24% of total loans compared to $34.8 million or 0.94% of total loans at December 31, 2019.

Below is a brief summary of the quantitative and qualitative portions of the allowance for credit losses currently and at year end 2019:

Below is a breakdown of the Bank's loan portfolio by segment as of March 31, 2020:

Capitalization
As of March 31, 2020, the Bank's leverage ratio was 10.05%, the common equity tier 1 capital ratio was 10.80% and the total capital ratio was 14.26%. As of December 31, 2019, the Bank's leverage ratio was 10.25%, the common equity tier 1 ratio was 10.51% and the total risk based capital ratio was 13.63%.

Conference Call and Webcast
A conference call with simultaneous webcast to discuss Preferred Bank's first quarter 2020 financial results will be held tomorrow, April 23, 2020 at 2:00 p.m. Eastern / 11:00 a.m. Pacific. Interested participants and investors may access the conference call by dialing 844-826-3037 (domestic) or 412-317-5182 (international) and referencing "Preferred Bank." There will also be a live webcast of the call available at the Investor Relations section of Preferred Bank's website at www.preferredbank.com. Web participants are encouraged to go to the website at least 15 minutes prior to the start of the call to register, download and install any necessary audio software.

Preferred Bank's Chairman and Chief Executive Officer Li Yu, President and Chief Operating Officer Wellington Chen, Chief Financial Officer Edward J. Czajka, and Chief Credit Officer Nick Pi will be present to discuss Preferred Bank's financial results, business highlights and outlook. After the live webcast, a replay will remain available in the Investor Relations section of Preferred Bank's website. A replay of the call will also be available at 877-344-7529 (domestic) or 412-317-0088 (international) through May 7, 2020; the passcode is 10142684.

About Preferred Bank

Preferred Bank is one of the larger independent commercial banks headquartered in California. The Bank is chartered by the State of California, and its deposits are insured by the Federal Deposit Insurance Corporation, or FDIC, to the maximum extent permitted by law. The Bank conducts its banking business from its main office in Los Angeles, California, and through eleven full-service branch banking offices in California (Alhambra, Century City, City of Industry, Torrance, Arcadia, Irvine, Diamond Bar, Pico Rivera, Tarzana and San Francisco (2)) and one branch in Flushing, New York. Preferred Bank offers a broad range of deposit and loan products and services to both commercial and consumer customers. The Bank provides personalized deposit services as well as real estate finance, commercial loans and trade finance to small and mid-sized businesses, entrepreneurs, real estate developers, professionals and high net worth individuals. Although originally founded as a Chinese-American Bank, Preferred Bank now derives most of its customers from the diversified mainstream market but does continue to benefit from the significant migration to California of ethnic Chinese from China and other areas of East Asia.

Forward-Looking Statements
This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include, but are not limited to, statements about the Bank's future financial and operating results, the Bank's plans, objectives, expectations and intentions and other statements that are not historical facts. Such statements are based upon the current beliefs and expectations of the Bank's management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements. The following factors, among others, could cause actual results to differ from those set forth in the forward-looking statements: changes in economic conditions; changes in the California real estate market; the loss of senior management and other employees; natural disasters or recurring energy shortage; changes in interest rates; competition from other financial services companies; ineffective underwriting practices; inadequate allowance for loan and lease losses to cover actual losses; risks inherent in construction lending; adverse economic conditions in Asia; downturn in international trade; inability to attract deposits; inability to raise additional capital when needed or on favorable terms; inability to manage growth; inadequate communications, information, operating and financial control systems, technology from fourth party service providers; the U.S. government's monetary policies; government regulation; environmental liability with respect to properties to which the bank takes title; and the threat of terrorism. Additional factors that could cause the Bank's results to differ materially from those described in the forward-looking statements can be found in the Bank's 2019 Annual Report on Form 10-K filed with the Federal Deposit Insurance Corporation which can be found on Preferred Bank's website. The forward-looking statements in this press release speak only as of the date of the press release, and the Bank assumes no obligation to update the forward-looking statements or to update the reasons why actual results could differ from those contained in the forward-looking statements. For additional information about Preferred Bank, please visit the Bank's website at www.preferredbank.com.

Financial Tables to Follow

*Incudes loans held for sale